It Takes A Transit Village

Cities that once resisted mixed-use projects are now clamoring for the modern mosaic known as the transit-oriented development (TOD), both as a tool for economic growth and a weapon to combat sprawl and congestion, say architects and transportation consultants. That is creating unprecedented opportunities for developers and investors able to wade through complexities and wait patiently for higher-than-average returns.

Loosely defined, a TOD is a moderate to high-density development project featuring a new urbanist-style mix of residential, employment and retail uses, all in short walking distance to adjacent public transportation. There are more than 100 such transit villages operating in the U.S. with at least 100 more planned, says Robert Cervero, urban planning professor at the University of California-Berkeley and author of the recent research report, “Transit-Oriented Development in the United States: Experiences, Challenges, and Prospects.”

“Everybody wants one these days, despite their complexities,” says Marilee Utter, a national transit consultant for Denver-based Citiventure Associates. “It is the new economic development tool for cities, just like the new ballparks and new aquariums were.”

TODs are no longer the tough sell they once were to investors, says Michael Wohl, joint developer of the elaborate $500 million, 41-acre mixed-use Sheridan Stationside Village community planned along I-95 in Hollywood, Fla.

“They've become a very sexy development for institutional and private investors, who have a much better understanding of mixed-use today,” says Wohl, a partner with Pinnacle Housing Group, which counts a Publix grocery and L.A. Fitness among the tenants committed to the Sheridan project, which will combine office, retail, and residential uses. Office rents at East Coast transit developments, Wohl notes, tend to be at least $3 to $4 per sq. ft. above market rates.

Lessons learned

Mark Farrar, a developer with New York-based Millennium Partners, refers to TODs as a win-win scenario. Compared with five years ago, there's a wealth of knowledge about transit-related projects and dozens of case studies to learn from, Farrar says. “The pioneers have really paved the way, and there is a track record of how they work, instead of just conversation of what they could be.”

But from an execution standpoint, there are more moving parts and potential snafus than just about any type of real estate undertaking, he quickly adds. Farrar's firm is developing the 18-acre Pleasant Hill Transit Village in Pleasant Hill, Calif., which will feature 549 residences, 35,000 sq. ft. of retail and about 300,000 sq. ft. of office built on land owned by Bay Area Rapid Transit District (BART) and leased to Millennium.

Despite the obvious amenities, “it's that sense of community and identity that people are really paying for,” says Utter. Residential is generally the best earner among the mix of transit-side uses, producing rent premiums of 15% to 20%. Depending on market dynamics, the office and retail components can approach similar performances in many cases, Utter says.

Residents don't mind paying slightly more for a transit-oriented home because they'll spend less on gas and other car costs, say experts. In fact, transportation accounts for the second biggest slice of the family budget at 17% behind only shelter at 33%, according to Consumer Credit Counseling.

Other signs point to bullish growth. As the Federal Transit Administration is currently processing an estimated $65 billion in transit-related requests, studies confirm a pent-up demand for clustered urban living, Utter says.

For three consecutive years, sites near transit stations were named top development bets by PricewaterhouseCoopers and the Urban Land Institute in their annual “Emerging Trends” report.

Meanwhile, the ridership on public transportation systems is up 3.2% in the first six months of 2006, according to the American Public Transportation Association. Light rail, the most desirable transit mode, enjoyed the highest percentage growth at 9.4% in that span.

Varying greatly in scope, these developments are designed to reduce reliance on single-occupant vehicles, but commonly offer commuter and tenant parking spaces in smaller-than-average ratios.

Patience required

Transit villages present challenges that stretch well beyond those of the typical mixed-use complex, including their exceptionally drawn-out nature. Millennium's BART project, for example, will have taken more than a decade from planning to completion in 2011.

Patience is a prerequisite when it comes to TODs, says Lynn Colosi, senior vice president of Clear View Strategies, a Pittsburgh transit-consulting firm.That's because TODs involve so many entities, including cities, counties, states and transit authorities, and so many other factors such as zoning variances, hearings, neighborhood groups and multiple developers.

“There's still a bureaucratic process when you're dealing with the public sector, and the development community doesn't always have the luxury to be patient. If the pieces don't fall in place early, it usually spells failure.” There's no definitive data on failure rates, but projects initiated by transit agencies are more apt to fall apart than developer-driven ones, she notes.

Colosi says it's imperative that developers line up partnerships from the get-go. “If you get legislators, the municipality, the transit district and everyone else on board early, they'll buy into the project and even become champions for it. If you try to piece this together after the fact, it's an uphill fight.”

Because TODs can take up to a decade to complete, maintaining continuity at the government level can be a problem, says Ray Peloquin, vice president of RTKL Associates. “In a lot of jurisdictions, that's longer than a lot of these people stay in office.”

Neighborhood groups often resist transit villages because they fear their density will increase traffic, says Chek Tang, who as principal of Oakland-based architectural firm McLarand Vasquez Emsiek & Partners has worked on a half dozen such projects in Northern California. But it's that density that reduces traffic because it promotes transit use, he says. “Cities are realizing they have to build density somewhere, and they have to build it into a 24/7 environment,” adds Peloquin. “That's what creates and sustains a TOD's density.”

Mixed-use zoning can still translate to mixed-up zoning. “Development around transit is harder because you end up having to break all the rules,” says architect Tim Van Meter, a Denver-based partner in Van Meter Williams Pollack. TOD-friendly construction codes are seldom in place, and efforts to win zoning variances to build “can be like pulling teeth without Novocain,” he says.

Battling higher costs

Construction costs are also greater, not only because no two projects are alike, but because work must often be performed gingerly to minimize interruption of traffic, particularly at urban infill sites at busy intersections, consultants say. Developers must also create an array of amenities such as plazas, park-and-ride spaces, and bike paths not required in typical projects, Colosi says.

The Mosites Co. and East Liberty Development Co., partners in the new Eastside transit-village project in Pittsburgh, are spending 10% to 12% more than normal to integrate transit components at the sites. Because TODs are consistently heavy in front-loaded costs, Utter says, “the only hope you have to make money on a deal is to have enough density to [compensate for] all those extra costs.”

Some cities are relaxing old standard requirements of four to five parking spaces per 1,000 sq. ft. of construction once they realize tenants will use transit more and cars less, consultants say.

Shared parking systems that free up residential spaces for retail and office use by day and vice-versa by night, as well as off-site parking programs, are being used to compensate, Tang says. Still, parking formulas continue to be misunderstood in many cities “mostly because America still equates one person with one car,” Peloquin adds.

Finding affordable and strategically situated land for transit stations in dense urban areas is also getting tougher, says Utter. York Residential, one of a handful of developers active in transit-oriented projects along the recently double-tracked Tri-Rail commuter rail corridor between Miami and West Palm Beach, considered itself extremely fortunate to land its site, says York's regional managing director Kathleen Yonce. “It was nothing short of a miracle.”

Success stories

There's no shortage of bellwether projects in the sector. Englewood City Center, 10 miles south of downtown Denver on the site of the former Cinderella City Mall, is considered a national model.

With 350,000 sq. ft. of retail including a Wal-Mart, 450 residential units, city offices, a library, park and museum, the 55-acre project exceeded ridership projections by 40% in just three months after opening in 2000, says Utter, who consulted on the project.

The station addressed several local and regional needs. It provided a centrally located transit hub for suburban commuters who didn't want to drive downtown, plus it fulfilled a need of the lower-middle-class community for additional merchants and sales tax revenue.

The site also benefited from having just one owner, strong city support, neighboring residential density and existing infrastructure designed to handle the traffic load, she says. Light rail and buses now serve the project.

Premium parcels

Land values around urban cluster stations often rise substantially, according to the Oakland-based Center for Transit Oriented Development. Land along the Rosslyn Ballston Corridor in Arlington, Va., increased 81% in a 10-year span ending in 2003, which enabled Arlington to earn a top-notch AAA bond rating.

Currently, TOD residential development is more of a profit center than retail and office. However, a few companies are consolidating offices at transit stations, says Cervero. BellSouth located operations hubs at three different mixed-use stations along Atlanta's MARTA line. “BellSouth wanted a more productive work force,” he says.

The offices, which employ between 2,000 and 3,000 workers per site, provide BellSouth employees with many benefits in the form of reduced stress and transportation costs, says company spokesman Joe Chandler.

TOD consultants also point to Mockingbird Station in Dallas. The project opened six years ago at Mockingbird Lane and U.S. 75 as a highly successful development. The facility includes 180,000 sq. ft. of retail and restaurants, 211 loft apartments and 152,000 sq. ft. of office space.

A group led by project developer Kenneth Hughes completed the project in 2000 for about $105 million and sold it to New York-based Real Estate Capital Partners in 2005 for an undisclosed sum.

Rents at Mockingbird Station's lofts command a 40% above-market premium, say two transit-village experts, although Hughes would only say his TOD “was a successful investment.” Hughes was quick to stress that solid real estate fundamentals “were already present at the site before we built, irrespective of the rail.”

At the project's onset, Hughes was faced with the enormous engineering challenge of putting 1,380 of Mockingbird Station's 1,600 parking spots underground.

“We had to excavate almost the entire site,” Hughes says. “But if you don't hide the parking, you can't produce an urban space.” Hughes also integrated a half-century-old Southwestern Bell Telephone warehouse into the project.

Hughes recently launched development of another large transit village, the $500 million Pacific Quay at Piers 2-11 in Honolulu Harbor that will eventually be served by a streetcar system and an intra-island ferry stop that interfaces with the city's ample cruise-ship traffic. The four-year project, done in partnership with the state, will include 375 lofts, office space, a park and at least 44,000 sq. ft. of retail.

Full-circle investment

Urban cluster developments are slow to rise and slow to pay off, according to consultant Utter. “It's common that you don't see returns for five to seven years. Because of upfront costs, you are generally going to be underwater for three to five years before you gather any momentum.”

A fitting example is the Mockingbird Station, which after five years is just now starting to accelerate into profitability, Hughes says. “You have to have patient money to do this type of mixed-use.”

The most commonly accepted profit for developers partnering with public entities on transit villages is a cash-on-cash return of 12%, Utter says. Typically, lenders will agree to about an 80% loan-to-value ratio, experts say.

More and more, developers are tapping into state transit funds targeted for bike paths, access and public projects to help them pencil TODs, Cervero says. “While there's a lot of money getting shifted to transit-oriented development to create these privileged places, you can certainly argue that this is fairly responsible public policy.”

But architect Van Meter cautions that transit alone is not the secret ingredient to a successful development. “Real estate fundamentals have to be there at a transit station, or you're going to miss the train.”

Steve McLinden is a Dallas-based writer.

Five keys to a smart transit-oriented project

Urban cluster projects have a delicate chemistry. With so many variables, players, financial formulas, and expectations involved, it's easy to end up on the wrong side of the track before the first shovel of dirt is even turned.

“From a city's point of view, these transit nodes will become a gateway to the city, and everybody has high expectations of what that gateway should look like,” says designer Chek Tang, principal of Oakland, Calif.-based McLarand Vasquez Emsiek & Partners, which specializes in transportation-oriented developments (TODs). Hence, laying the early groundwork for the TOD is every bit as important as its execution, says Tang.

“City governments have an entrenched lack of familiarity in TOD projects,” adds Austin City Councilman Brewster McCracken, the city's point person for two planned transit villages along its future light-rail line. “So, it's absolutely critical to be transparent from the very beginning and to have shared information and shared goals.”

That's a message that Marilee Utter, a Denver-based national transit consultant for Citiventure Associates, routinely carries to cities, architects and developers. Over the years, Utter has compiled a list of five crucial steps cities should take with developers in the early-planning process of a transit-oriented project:

Map out the objective: Cities should aggressively determine the project's initial vision, instead of the developer, urges Utter. “Who better to know the city's culture than the people who hold office there?” Conversely, communities should cede decisions on design elements such as pedestrian-flow patterns to the architects and developers.

Optimize land usage: Cities should commit to studying and understanding a TOD's requirement for higher-density development and less-than-standard parking ratios. Cities should assist developers with land assembly from the beginning of the project, Utter stresses.

Listen to your neighbors: Nearby residents are the most likely to resist plans for a transit village. Their concerns should be prioritized in TOD master plans, tenant mix and traffic flow.

Use quality materials: Construction materials should be top-of-the-line and help make a statement about the project's staying power, Utter says. Additionally, cities should insist on exemplary street designs, but not demand that every enclave or street have retail.

Understand your customer: Project architects and developers should strongly link the development's access points to its design and theme to further create continuity. “Always think about the consumer,” emphasizes Utter. — Steve McLinden